Are budget surpluses good or bad for a nation’s economy? In George Osborne’s first term as Chancellor of the Exchequer, action to reduce the UK’s budget deficit restored fiscal sustainability and was consistent with economic recovery. In his Mansion House speech on June 10, he therefore suggested that new legislation should be introduced to entrench budget surpluses “in normal times”.

Osborne’s proposal is a shift in official rhetoric, but it is far from being a radical new departure. The commentariat has forgotten Gordon Brown’s insistence on “prudence” at the outset of his Chancellorship. A “Code for Fiscal Stability”, no less, was laid before Parliament under section 155 of the 1998 Finance Act and remains on the statute book.

Its substance is that the fiscal position should be “sustainable over the long term”. Brown was vocal about his “Golden Rule”, that the current budget (the budget excluding capital items) should be in balance or surplus over an entire business cycle, and the “Sustainable Investment Rule”, that any borrowing to finance investment should not cause public debt to rise too quickly. Osborne’s planned new legislation has much the same import as Brown’s Code for Fiscal Stability. With a few words tweaked on the dividing line between current and capital expenditure, they would in fact be identical.

The Code excited little controversy 17 years ago, but Osborne’s latest ideas soon provoked a letter of protest from 79 prominent left-wing economists in the Guardian. The signatories included Thomas Piketty, the celebrated author of Capital in the Twenty-First Century, and David Blanchflower, who served on the Monetary Policy Committee between 2006 and 2009. Comparisons are inevitably being drawn between the letter from the 79 and another much-publicised predecessor, the letter to The Times from 364 economists in March 1981. Like the recent letter to the Guardian, it was a response to a clear long-term commitment to sound public finances from a Conservative government, as well as to meaningful and allegedly painful short-term austerity to reduce the budget deficit. Further, in both cases the letter-signing economists would characterise themselves as “Keynesians”, meaning that they believed fiscal policy should be used to regulate demand, output and employment.

Keynes was actually more conservative than the 79 suggest. He said that the government could run a deficit to fund capital expenditure when this was necessary to maintain employment at its natural level. However he also said that government should always maintain a surplus on its current account (Skidelsky's biography of Keynes, volume 3, p. 274.)

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